There has been little sunlight this crypto winter, so it may seem strange to bring up the “Bitcoin as legal tender” argument again. That is, will or should any country, besides El Salvador and the Central African Republic (CAR), which have already done so, declare Bitcoin (BTC) as the official national currency?
The International Monetary Fund (IMF) raised the issue again last week in a paper laying out nine cryptocurrency-focused policies. behavior that its 190 member countries should adopt. The first thing on his “don’t do” list was raising cryptocurrencies to “legal tender.” Or, as the evaluation of the executive board of the multilateral lending institution indicated:
“The directors generally agreed that crypto assets should not be given official currency or legal tender status to safeguard sovereignty and monetary stability.”
It may not be fair to ask the question with cryptocurrencies hot on its heels, but was the IMF right to warn its member banks about cryptocurrencies? And if so, what exactly is missing from the composition of private digital money that makes it unsuitable as an official national currency? Maybe it’s Bitcoin’s well-documented volatility, but if that’s the case, couldn’t the world’s oldest cryptocurrency continue to grow into a new role as an ancillary token, perhaps in a few years when it has more users, it’s more liquid? and exhibit less? price variation?
The IMF must tread carefully
“The IMF’s mandate is to promote global economic stability and growth. It is therefore reasonable that the IMF has recently advised countries to refrain from granting legal tender status to crypto assets, which are, by design, often disruptive in nature,” said Gavin Brown, Associate Professor financial technology at the University of Liverpool. Cointelegraph. “Such a disruption arguably presents both opportunities and threats, but the IMF must follow a more prudent path when faced with such open uncertainty.”
“There are very good economic reasons why most countries would not want to adopt cryptocurrencies like BTC as their local token,” James Angel, an associate professor at Georgetown University’s McDonough School of Business, told Cointelegraph. “In short, they don’t want to lose the profits from printing their own money or the economic control over the economy that fiat currencies provide.”
While cryptomaximalists may criticize governments for endlessly printing money to cover deficits, “sometimes the right thing to do is to print money,” Angel added, “like in the Great Recession or the pandemic.” The trick is not to print too much, as happened in the pandemic.
‘Bitcoin was made for the Global South’
In its policy paper, the IMF had multiple arguments for its position beyond the well-documented volatility of cryptocurrencies. Could expose government revenue to exchange rate risk. Domestic prices “could become very unstable” because businesses and households would spend time deciding whether to hold fiat or BTC “instead of engaging in productive activities.” Governments would have to allow citizens to pay taxes in Bitcoin, and so on.
The adoption of cryptocurrencies as legal tender could even affect a government’s social policy goals, the IMF paper stated, “particularly for unbacked tokens, as their high price volatility could hit poor households the hardest.”
But questions remain. Even if the IMF’s arguments are valid and valid in most circumstances, are there no exceptions? What about developing countries struggling with inflationary currencies, like Turkey?
“Bitcoin was made for the Global South,” Ray Youssef, co-founder and CEO of Paxful, and founder of the Built With Bitcoin Foundation, told Cointelegraph. “In the West, a lot of attention is paid to the alleged volatility of Bitcoin. That’s because the world runs on the dollar and the West is protected from global inflation. Right now, Turkey has an inflation rate of more than 50% and Nigeria has an inflation rate of more than 20%; in these economies, Bitcoin is a strong bet.”
But even in cases like these, it may not be that easy. “For cryptocurrency to be used effectively as legal tender in developing countries, governments will (still) need to invest heavily in the technology infrastructure and a proper regulatory framework,” Syedur Rahman, a partner at the law firm, told Cointelegraph. attorneys Rahman Ravelli. If this can be done, “it will help in financial inclusion.”
“Going to a foreign/strong currency or monetary standard is the last resort to curb hyperinflation,” Angel said. “But even weak governments like to have the power of the printing press, as it provides a tax mechanism to pay the troops.”
The Central African Republic made cryptographic legal tender in April 2022, the second country to do so, after El Salvador. Some CAR representatives said that cryptocurrencies would help reduce fees on financial transactions within and outside the country. Maybe that is also a valid reason to raise cryptocurrencies to official currency.
Rahman acknowledged that “there are benefits like seeing a reduction in transaction fees for financial transactions. If there is a weak traditional banking system or a lack of trust, then cryptocurrency can certainly provide an alternative means of payment.”
“Remittances are a great use case for Bitcoin,” Youssef said. “Money transfer companies charge high fees and it can take days for funds to arrive.” Bitcoin lowers fees and transactions can take minutes. People who may not have a bank account can also take advantage of remittances. “This is a big problem when you look at the amount that remittances bring to some countries. In El Salvador, remittances represent more than a quarter of the country’s GDP.
Others were dismissive, however. “I think that legal tender status in this context is probably a trick. I’m not sure how I could be more motivated to send BTC to someone who lives in CAR just because BTC is now considered legal tender in that jurisdiction,” David Andolfatto, chair of the economics department and professor at Miami Herbert School of Business from the University of Miami. he told Cointelegraph.
Furthermore, the act of granting legal “foreign” currency status “seems to me to be an admission that a country’s institutions cannot be trusted to govern society effectively,” added Andolfatto, a former senior vice president of the Federal Reserve Bank of St. Louis, where he became one of the world’s first central bankers to give a public talk on Bitcoin in 2014.
Bitcoin remains questionable as legal tender because it does little to quell the so-called “flight to safety” phenomenon, in which demand for money swings wildly with sudden shifts in consumer or business sentiment, Andolfatto explained.
“These violent swings in the price level are unnecessary (…) What is needed is a monetary policy that expands the money supply to accommodate the demand for money in times of stress. The provision of an ‘elastic currency’ serves to stabilize the price level to the benefit of the economy as a whole”.
“Transaction fees are a drag on global economic activity,” Brown noted, and developing nations often bear the brunt of these inefficiencies. Still, “in my opinion, a shift to crypto assets, like in El Salvador today, is too big a risk to take,” Brown said. Angel from Georgetown added: “El Salvador and the Central African Republic are special cases in that they did not have their own currency to begin with.”
more maturity
Bitcoin is still relatively young and volatile. But with broader adoption, including by institutional investors, couldn’t it become a stable asset, more like gold? “There is some merit to this argument,” says Andolfatto. “I think the volatility of the BTC price will decrease as the product matures.” But even if BTC remains stable for long periods of time, “it will always be susceptible to ‘flight to safety’ phenomena that would lead to sudden large deflations, or inflations if people dump BTC,” he added. “BTC will appear stable, but it will remain fragile.”
Youseff, like some others, suspects that the IMF has ulterior motives in all of this. The fund is interested in self-perpetuation, he suggested, adding:
“Bitcoin has been shown to reduce inflation, give more people access to the international economy and work, increase transparency, and act as a universal money translator. It also has the potential to decrease a country’s dependence on international centralized power, such as the IMF. It’s not hard to connect the dots as to why the IMF doesn’t welcome Bitcoin.”
“Crypto assets like Bitcoin are still young in monetary terms,” Brown noted, but their inherent weaknesses, such as price volatility and pseudo-anonymity, could present “insurmountable challenges from the perspective of nation-states.” Nonetheless, Bitcoin has become a backup alternative when fiat currencies fail due to macroeconomic events such as hyperinflation and controls around capital flight.”
If he’s not the lead, is he still a supporting role?
For the sake of argument, let’s agree with the IMF, crypto skeptics, and others that there is no future role for Bitcoin as legal tender or official currency, even in the developing world. Does that still prevent BTC and other cryptocurrencies from playing a useful social or economic role globally?
“I see a very useful role for crypto technology, which is why I have been a strong supporter of CBDCs (central bank digital currencies) since 2014,” Angel replied. “There are very good reasons why more than 100 central banks are working on this.”
But he is skeptical of Bitcoin because “governments have a long history of neglecting private money. It amazes me that governments have taken so long to react and try to sideline Bitcoin in order to get all the seigniorage revenue for themselves.”
Overall, crypto assets like Bitcoin may remain “in limbo for many nation states and regulators,” Brown opined, given that they are inherently anti-establishment but also “almost impossible” to ban in free societies.
Bitcoin and other digital assets can still play a positive role as “the trigger that forces the monopoly, which is the central banks,” to rethink their monetary policies “and to innovate in response,” Brown said.
